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Is there Macroeconomics?

letsgetitdone's picture

The claim of Austrian school economists that "there is no macroeconomics" because the political-economic system at the macro level is explainable in terms of the aggregated attributes and activities of political-economic agents at the micro-level of that system is false, silly, and ignores the findings of many other sciences! That's because macro-level behavior includes structural and holistic properties of these systems that are not explainable by individual level phenomena or aggregations of them.

The whole thrust of contemporary complexity and complex adaptive systems theory along with findings dominant in philosophy, in chemistry, in biology, in social sciences other than economics, and even in some parts of physics no longer supports the reductionism some Austrians defend when they say “there is no Macro”, and imply that only the individual level of economic interaction is real. So, I think they need to get over methodological individualism and move on. Maybe reading Harold Morowitz's The Emergence Of Everything, will help them do that. Or maybe Popper and Eccles The Self and Its Brain, can help them. Or perhaps John Holland's Emergence, can break the thrall that holds them. Or Alicia Juarrero's Dynamics in Action, might be the key to freeing them from the mental chains that bind their thinking. There are any number of books that can do this for them. But I'm afraid reading Mises, Rothbard, and most of Hayek will not help much.

However, later in life, Hayek came to believe in emergence, as did his friend Karl Popper, who earlier had strongly supported the philosophical position of methodological individualism. However, there's a fundamental contradiction between methodological individualism, the basis for the claim that “there is no macro”, and the notion of emergence.

Political systems with their institutions, including sometimes, formal government emerge from social interaction among human beings. Formal Governments may seem to be different because sometimes those who run them may seek to impose institutional arrangements that are inconsistent with the evolved emergent patterns of society. However, this is a separate issue from the issue of whether the macro-level political economy imposes real constraints and causal influences on individuals interacting with the higher level macro system. As soon as one recognizes that this kind of influence is a fact, the possibility of an economics dealing with the macro level, independent of its micro-level theory, becomes very real.

Once we recognize this possibility, we have to start asking questions about macro statics and macro dynamics, the tendencies of the macro system over time, and how these tendencies may be changed for good or ill by human action. We have to recognize that, contrary to the “Austrian” position, there is macroeconomics of both conservative and progressive varieties!

The conservative position is that human intervention at the macro level should be minimized because our knowledge cannot be as good as market signals in telling us how to act upon that system. That is, our knowledge can't be as good as the market's. That is the position articulated and defended by Hayek.

But the progressive position is that we can affect the macro system in a beneficial way, if we implement policies that support tendencies toward free self-organization by individuals in shaping the future. In addition, modern social dynamics has shown time again that markets are unstable because participants in them often have an interest in subverting them and undermining the level playing fields required for the market system. Markets are Promethean Complex Adaptive Systems (PCASs), in the sense that real world markets are not classical free markets, but CASs whose human and institutional agents are always trying to subvert them in order to exert their own "god-like" mechanistic control over how they work.

So, the longer term tendencies of unconstrained capitalism are away from truly free markets and democracy, and toward oligarchy, plutocracy, lemon socialism, kleptocracy, and eventually fascism. And further, our knowledge of social and political dynamics may well be good enough to stop this kind of evolution, and to use productive forces to enhance democracy, open society, and real, rather than just formal, individual liberty. But I'll leave discussion of this larger question for other posts.

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techno's picture
Submitted by techno on

I pretty much wasted my youth building flying model airplanes. One of the primary lessons I learned is that some things just do not scale very well. For example, the tail feathers on models built to resemble WW II fighters almost always had to be enlarged or the plane would not fly well (if at all.) This can be explained by Reynolds numbers but even so, you kinda have to wonder why tail sections don't scale. And let's not even try to scale rivet heads.

The idea that macro economics cannot exist because it is merely an aggregate of individual actions CLEARLY suffers from a scaling problem. The "Reynolds number" here are the numerous examples of when something that is good for an individual (lowering the wages in his factory) is disastrous for the larger community. The whole idea of Macro is to study those economic actions (minimum wage laws) that measure their benefits to the whole—even if it does mean the wage cutter has to get by with two houses instead of three.

Hayek got a lot of things wrong because he could not understand the problems of scaling. Maybe he should have wasted HIS youth doing something difficult like getting a pile of balsa and silk to fly (and getting back on the ground in one piece.)

letsgetitdone's picture
Submitted by letsgetitdone on

Almost the first thing I learned in Graduate School in 1960 was about avoiding the ecological and aggregative fallacies, and the distinctions among analytical, structural, and global properties of whole systems. I can't believe the Austrian School hasn't come to terms with these ideas, or developed any way to counter. And it's hard for me to understand how anyone can take them seriously until they do.

RanDomino's picture
Submitted by RanDomino on

The merits of their ideas are irrelevant because the implications of them are convenient to the powerful.

techno's picture
Submitted by techno on

Is that you were in graduate school in 1960—back when there were REAL scholars in places like economics. When I think of the guys I had for economics in the early 1970s, even guys like Krugman make me shudder at the comparison. I once had Walter Heller for a class and he claimed he was the man who taught JFK Keynesian economics. I remember how utterly dismissive he was of the "idiocies of Milton Friedman".

letsgetitdone's picture
Submitted by letsgetitdone on

took economics in Graduate School, but had a year of it at Cornell in 1958 taught by a young man whose name I forget who was deadly dull. But he taught Keynes, Heilbroner and Samuelson and aiigned many pages to read every week. So, I learned a lot and came out a Keynesian, probably more radical then than Krugman is today. I loved Walter Heller, and I believe him when he says he taught JFK Keynesian Economics. He was an important part of that Administration and continued to have an influence on LBJ too. Galbraith, the elder, had influence too.

techno's picture
Submitted by techno on

Although his jokes were sometimes pretty lame. For example, he once explained that an economist "was someone who would marry Elizabeth Taylor for her money." When he told that joke to JFK in 1962, I am certain Kennedy just roared with laughter. When he told it to our class in 1970, there were many of us who looked at each other with a "why else would anyone marry her?" look on our faces.

Submitted by Hugh on

I agree with techno. Insights like the paradox of thrift are essentially macro in nature and show that individual goods if aggregated can produce opposite results to the whole. If one person or some people save, that may be good for them, but if everyone does, economic activity declines and you end up with a deflationary spiral and depression.

And as we are seeing more and more, class, as manifested by our elites, is important, even crucial to understanding what is going on in the economy. Indeed the existences of classes show why markets can never be free. As soon as anyone or any group gains a sufficient share of any market, they use that share to manipulate and control that market rendering it "unfree". Repeat this across other markets and you end up with a class dominated economy, the very opposite of a lot of autonomous free acting individuals with plenty of alternatives with which they can punish bad actors.

I think it often gets overlooked that the Austrian school is just a reformulation of neoclassical economics. The emphasis on micro means that you must have individuals that can be aggregated and this means there must be constraints on their actions, a kind of rationalism whether chosen, inherent, or imposed. So, for example, even if you are an Austrian and believe in irrationality to some extent, the constraints you place on individuals essentially force them to act as if they were rational and that failing, the theoretical punishments markets are supposed to mete out to them, will effectively marginalize them, producing an overall rational result.

Hugh

letsgetitdone's picture
Submitted by letsgetitdone on

with them all the time. But the real exchanges are something else.